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Saturday, September 29, 2012

"Greece 10 years ahead"
(GTYA) is the title of a study published by the Athens Office of
McKinsey in mid-2011. It outlines a National Growth Model which, the
study predicts, would create over 500.000 new jobs and add roughly 50
BEUR to Greece's GDP within a decade. The study consists of 72 pages. I have already explained in a previous post that I will make short posts about each major point of the study for those who prefer not to read 72 pages.

The study focuses on growth opportunities in 5 major 'production
sectors' which are already of prime importance to the Greek economy and
on 8 'rising stars', i. e. new sectors where present activity is still
small but where significant potential can be expected. In this post, I
will focus on the 'production sector' of energy (page 43 in
the GTYA-report).

Production Sector --- Energy
GTYA's assessment of the current state of Greece's energy sector is rather devastating ("high energy consumption, low fuel efficiency, low labor and capital
productivity and an expensive energy mix characterize the Greek energy
sector"). Consequently, that sector would offer significant potential if only by turning it around. GTYA outlines 14 possible areas across four the following four areas:

Wednesday, September 26, 2012

Picture a company which has 100 MEUR in debt and a positive cash flow (i. e. the company does not need any new debt). Suppose that the company has just taken a major hit with one of its investments which it had to write off. Cash flow is not affected by that (only a book loss) but the company's net worth has shrunk in half.

The debt is up for refinancing. The banks are all nervous because of the halfing of the net worth. Tedious negotiations take place about the refinancing and they bind the company's resources for about one year. At the end of that year, the banks have finally agreed to a refinancing (no Fresh Money had to be disbursed).

At the end of this exercise, the company (and the banks) has the same 100 MEUR debt as before. What was the great accomplishment? The great accomplishment was that debt which was due is no longer due because it was refinanced. If all companies had to repay their debt when do without being able to refinance it, the world would soon be without companies.

Greece is not quite identical because Greece does need some Fresh Money. However, the bulk of the new financing which Greece needs has been and still is for refinancing.

Wild guesses have been published in recents days about the "hole" which Greece has in its books. It started with 11,2 BEUR and according to DER SPIEGEL, it would be well over 30 BEUR if one extended the austerity measures for a couple of years.

According to DER SPIEGEL, that hole is due, among others, to the fact that 28 BEUR in Greek bonds held by the ECB fall due within those couple of years. Now who is kidding whom here?

What difference does it make to the ECB whether the Greek bond it holds on its books shows a maturity of 2014 or 2024? Absolutely none! Perhaps the maturity date should have been 2024 in the first place if the bond had been structured well.

The real Fresh Money which Greece needs consists of the following elements: primary deficit and funding/capital for Greek banks. Everything else is nothing but money changing hands, i. e. disbursing money in order to get it back.

The primary deficit is now down to the low single-digit BEUR (and could be a surplus in a year or two). Pardon my language, but this is chicken feed compared to the overall numbers being in play.

The funding/capital requirement of banks is more of an uncontrolled missile because it is very much influenced by the deposit flight. That deposit flight has averaged at least 30 BEUR annually in the last 3 years. Since the Greek banking sector still has about 150 BEUR of deposits, that enormous drain could go on for quite some time. But remember: deposit flight is a completely different animal than a primary deficit: the primary deficit is an expense, i. e. the money is gone when it is spent. Deposit flight is only a shifting of money from country A to country B. What country A loses, country B gains.

The other item affecting the funding/capital requirement of banks is the current account deficit because it withdraws liquidity from the domestic money supply. Greece's current account deficit (before interest expense) is likely to be break-even for 2012, if not even slightly positive. Again, that is not a "big hole".

In sum, the financial problem of Greece is phenomenally overstated by mixing refinancing requirements with Fresh Money needs. If one were to agree on a 2-year moratorium for principal and interest on ALL Greek foreign debt and if one found ways to stop deposit flight, Greece would problably need only a few individual billion Euros as Fresh Money during that time.

Just a refresher for those who are new to my blog. I have my own "early promising signals" that Greece is headed for a better future. I will know that Greece is headed for a better future when I sense:

* an obsession with import substitution* an obsession with export expansion* an obsession with making tourism/shipping competitive* an obsession with private foreign investment; and, last but certainly not least:* an obsession with the EU Task Force to do everything possible to modernize Greece's public administration and to make Greece a governable state

Tuesday, September 25, 2012

"Greece 10 years ahead"
(GTYA) is the title of a study published by the Athens Office of
McKinsey in mid-2011. It outlines a National Growth Model which, the
study predicts, would create over 500.000 new jobs and add roughly 50
BEUR to Greece's GDP within a decade. The study consists of 72 pages. I have already explained in a previous post that I will make short posts about each major point of the study for those who prefer not to read 72 pages.

On page 33, GTYA lists 20 priorities/measures which would unleash growth. I will simply list them below without further comment.

1. Introduce the Economic Development & Reform Unit (EDRU) as an institution under the Prime Minister to support the government in coordinating, facilitating and monitoring the implementation of growth reforms.
2. Establish Greece Ten Years Ahead Fund and develop National Growth Funding Program to inject lower cost liquidity into private sector companies.
3. Launch a phased Lean Processes Program to simplify licencing processes and reduce lead times.
4. Remove counter-incentives and barriers to scale (e. g. labor restrictions, SME taxation) and introduce sector output incentives for investments.
5. Re-prioritize public investments and rapidly launch growth-relevant, high domestic GVA infrastructure projects leveraging EU-funds and PPPs.
6. Revise the environmental and zoning framework to better balance growth and environmental priorities.
7. Re-visit the Fast Track for investments using proven Athens Olympics 2004 methods.
8. Re-design the University Business R&D and patenting framework to promote innovation and entrepreneurship.
9. Develop an effective and transparent mechanism to recruit local and international market-sourced talent for contract-based development into pivotel technical and/or managerial positions in the public sector.
10. Consolidate all state sectors' IT architecture design and strategic management into a central IT unit.
11. Expand IPSAS/IFRS double-entry standards across all state entities; establish a financial reporting consolidation system to monitor and manage performance centrally.
12. Broaden scope and goal of the State Assets Management Fund to maximize the impact of the privatization program and return to Greek state as shareholder.
13. Launch Ellada & Ergasia as a cross-ministerial program (see details in report).
14. Revamp technical, undergraduate and graduate education (see details in report).
15. Complete flexibility and efficiency-related labor reforms.
16. Accelerate decision-making in Council of State and earlier degree courts.
17. Consolidate all internal auditing functions of public sector companies into a Central State Auditing Unit.
18. Launch dedicated projects ('SWAT teams') to investigate possible informalities in different fields of economic activity.
19. Further optimize tax evasion counter measures, leveraging international practices in detection, segmentation and contact/collection.
20. Establish a Central Procurement Unit to define procurement strategy, monitor procurement practices and procure major common categories.

Well, the first reaction of a practitioner like myself is that this is a lot of consultants' talk. Indeed, it is. However, at least there is a choice of 20 points to select those from where consultants' talk should be developed into practical action plans.

"Greece 10 years ahead"
(GTYA) is the title of a study published by the Athens Office of
McKinsey in mid-2011. It outlines a National Growth Model which, the
study predicts, would create over 500.000 new jobs and add roughly 50
BEUR to Greece's GDP within a decade. The study consists of 72 pages. I have already explained in a previous post that I will make short posts about each major point of the study for those who prefer not to read 72 pages.

The study focuses on growth opportunities in 5 major 'production
sectors' which are already of prime importance to the Greek economy and
on 8 'rising stars', i. e. new sectors where present activity is still
small but where significant potential can be expected. In this post, I
will focus on the 'production sector' of tourism (page 39 in
the GTYA-report).

Production Sector --- Tourism
GTYA states that Greek tourism is not at all the success story which one might be tempted to believe. Since that sector makes up, directly and indirectly, about 15% of Greece's GDP, one might as well start there instead of getting lost in other details.

Since the Euro, Greek tourism was much more a function of the artificial - debt-financed - domestic demand than of international competitiveness. GTYA states that 70% of Greek tourism has been driven by domestic demand with only limited success in new markets like Russia and China. The tourist season is concentrated too much in the summer months (52% of arrivals in Q3) and tourists spend relatively less money in Greece than in Italy or Turkey (146 €/day in Greece versus 200 €/day in Italy and 162 €/day in Turkey). GTYA recommends to:

Where will the money come from? Well, we have come a long way to reach the point of even asking this question. In a market-economy, investment money comes from private investors. Private investors will bring that money if there is an attractive business framework and the prospect of earning a decent return on the investment.

That, of course, points to the overall challenge of Greece --- to become an attractive place to do business!

Sunday, September 23, 2012

If I recall correctly, the disbursement of the 31,2 BEUR tranche was originally due in June of this year. Remember, that was 3 months ago!

It was then postponed until September but September is now almost over. The last thing we hear is that there will be no action on Greece until Barack Obama is firmly re-installed for a second term as US President. That should mean no disbursement of the 31,2 BEUR until some time in November. By the way, that would be 5 months are the original date.

How does one live without 31,2 BEUR for 5 months? Particularly since fears were spread in June that Greece would run out of money "in a few weeks" if the 31,2 BEUR were not disbursed?

I have no idea and this only underlines the lack of transparency which is being demonstrated from all sides. In a normal restructuring, there would be a "sources & uses of funds" statement. It would show where the 31,2 BEUR come from, what they would be used for and when. If the sources are postponed, some of the uses have to be postponed. Which uses have been postponed since June as a result of the fact that the sources have been postponed?

The budget deficit is apparently quite a bit better than targeted, the primary deficit is almost marginal by now and the current account was in surplus in July. That probably helped Greece's cash flow a bit but, please, not to the tune of 31,2 BEUR!

I presume that the bulk of the 31,2 BEUR is required to pay off maturing debt. That's ok, but please remember that when European tax payers hear that Greece needs the 31,2 BEUR urgently, they think that Greece needs to urgently pay out 31,2 BEUR in comfortable pensions and other social benefits. It is only natural that they might conclude that Greece should cut pensions and social benefits.

Now, I have to assume that all the information about sources and uses of funds is on hand in secret Troika documentation. If it weren't, that is to say if even the Troika didn't understand the situation, then that would be really irresponsible.

But why does one not go public with that information? Why does one not explain in detail what Greece needs the money for? How much is for operational needs? How much for debt service? How much for financing deposit flight? Etc., etc.

If it turned out that the bulk of the money is needed for debt service and financing deposit flight, then the priorities would be to restructure debt service and contain deposit flight (instead of cutting pensions and social benefits).

Whichever way one slices it, credibility is not increased through such developments. And that is not only Greece's but also the Troika's credibility. And without credibility, there will never be much confidence (and without confidence, there will never be much money).

Saturday, September 22, 2012

"Greece 10 years ahead" (GTYA) is the title of a study published by the Athens Office of McKinsey in mid-2011. It outlines a National Growth Model which, the study predicts, would create over 500.000 new jobs and add roughly 50 BEUR to Greece's GDP within a decade. The study consists of 72 pages. I have already explained in a previous post that I will make short posts about each major point of the study for those who prefer not to read 72 pages.

The study focuses on growth opportunities in 5 major 'production sectors' which are already of prime importance to the Greek economy and on 8 'rising stars", i. e. new sectors where present activity is still small but where significant potential can be expected. In this post, I will focus on the "rising star" of generic pharmaceuticals (page 61 in the GTYA-report).

Rising Star --- Generic Pharmaceuticals
Generic drugs are being produced in Greece and they add about 1,2 BEUR to GDP at present. That is the good news. Also, the industry is dominated by Greek players. The not-so-good news (or rather: the tremendous future potential) lies in the fact that generic drug penetration is only 32% in Greece. The comparable figures in Central European countries range between 60-80%. The growth potential in Greece is obvious (internationally, the industry is expected to grow 5-9% annually).

One impediment for growth is that, by law, Greek generic drugs are priced at 90% of regular drugs while, internationally, they are priced at 30-80% of regular drugs. It would appear that a simple new law would make that industry more competitive. Such a new law should be conditioned on the industry's increasing its efficiency.

Presently, the industry is very fragmented with the 10 largest companies comprising only 35% of the market. Consequently, the cost base is relatively high and the industry requires significant consolidation to attain scale and efficiency. Furthermore, while the industry has high potential, there is a need for focusing on product niches and on targeted R&D.

Finally, and importantly, the industry already exports quite a bit and should have good further export potential both in neighboring countries as well is in the North. Greece's focus should always be on niches.

GTYA recommends that the Greek state should develop a comprehensive generics strategy involving all stakeholders in the industry. Government support for R&D and for raising financing should be considered as part of that strategy.

All in all, the consultants project that the generics pharmaceutical industry could double from 1,2 BEUR to 2,4 BEUR (or even more) within a decade. It would make Greece a player in an international growth industry and it would contribute to an opening of the Greek economy.

Greece urgently needs a shift in gears: away from the single-minded focus on Troika-negotiations and more towards a focus on future perspectives for the country. Otherwise, it may well happen that the Troika-operation turns out successful but the patient may not have survived it in sound body and mind.

Greek leadership is impressively resistant to advice. In fact, I would argue that Greek brainpower in general is quite resistant to advice. There have been important initiatives from international institutions regarding possible Greek policies. I am not aware that any of them triggered any discussion among Greek leadership and brainpower at all.

No single person or institution will have the right answers to all of Greece's problems but Greece is, in my opinion, in no position at all to turn down advice or, even worse, to ignore it. Instead, Greek leadership and brainpower should trigger intense discussions of all possible solutions.

I, for one, have two favorite proposals for Greece's future and I have written at length about them. One proposal ("EURECA") would address the country's debt problem and the other one ("Greece 10 years ahead") would address the country's economic problem.

Both proposals are a little over a year old. I venture to say the following: had Greece jumped on both proposals at the time, we would be talking about a different (and much more positive) Greece today!

My personal inclination is always on the side of the real economy (the "underlying") and much less so on the sovereign debt issues (the "derivative"). Thus, I will not discuss EURECA here. Instead, I will focus entirely on the recommendations of "Greece 10 years ahead".

"Greece 10 years ahead" (GTYA) is a fascinating presentation. Unfortunately, it will frustrate the "give-it-to-me-on-one-page"-reader because a well thought-out National Economic Growth Model cannot be put on one page. Still, I can only recommend that as many people as possible take a few hours of their time and go through the 72 pages in detail.

I will make my own contribution to the spreading of a GTYA-mindset. Since the whole presentation can't be put on one page, I will write several posts with each one of them focusing on indidual aspects of GTYA. Perhaps that will reach "give-it-to-me-on-one-page"-readers who would otherwise never become familiar with GTYA.

Thursday, September 20, 2012

I have written before about the McKinsey Report "Greece Ten Years Ahead" which was published about a year ago. Those who have a desire to become bullish about the future potential of Greece are invited to re-read that report. It is full of promising opportunities which Greece could have if it only put its mind to it.

And if that is not enough for you as far as positive vibrations about Greece are concerned, take a look at this event Reload Greece which will take place in London this coming weekend.

There are three ways to reduce imports: (a) reduce spending overall and thereby also reduce spending for imported goods; (b) maintain spending but spend the money on domestically-sourced products instead of imports; or (c) a combination of the two.

My guess is that the reduction of Greece's imports goes entirely on the account of reduced overall spending due to the depression.

However, let me make an academic argument: suppose Greece's spending overall had remained stable but the above 13,2 BEUR had been shifted from foreign-sourced to domestically-sourced. Would that not have been quite a stimulus for domestic economic activity and for new employment?

Even in a depression, new jobs can be created. They can be created by stealing them. They can be stolen from those foreign countries which export products to Greece which products Greece could produce just as well domestically.

Sustained long-term growth
requires long-term planning: identification of competitive advantages;
development of new industry areas and business lines; etc. That is, of
course, necessary for Greece but it takes time. Greece needs to,
parallel to the above, achieve some quick economic growth.

Quick economic growth is achieved by stealing market
share. Greece has to steal market share from those who presently produce
products abroad and sell them to Greece. Greece has to steal their
market share by producing the very same products on it own and “at
home”.

Where is the "obsession with import substitution"? Where is the populist cry to no longer subsidize foreign economies by buying products from them which products could just as well be produced in Greece?

Wherever the products are produced, that's where the jobs are. That's where the income taxes of those who hold those jobs are. That's where the corporate taxes of those companies are which make a profit in producing them. And, finally, that's where the dividend taxes are of those entrepreneurs whose companies make enough money so that they can take out dividends.

Tuesday, September 18, 2012

In previous posts on the monthly current account development, I have
compared year-to-date 2012 balances to the previous year. For example,
from January-July 2012, the current account deficit was 53% below the
same period of last year. That is quite an accomplishment.

To put the accomplishment into the right light, I will this time compare
January-July 2012 to the same period of the year 2008, by far the most
excessive year for Greece's external accounts.

In BEUR.

January - July

July

2008

2012

2012

Revenue
from abroad

Exports

11,4

12,3

1,9

Services (e. g. tourism)

19,2

15,1

3,6

Other income

3,2

1,9

0,3

Current transfers

4,7

3,5

0,3

----

----

----

Total revenue from abroad

38,5

32,8

6,1

Expenses
abroad

Imports

38,3

25,1

3,6

Services (e. g. tourism)

9,8

7,5

1,0

Other expense (e. g. interest)

9,5

4,2

0,5

Current transfers

2,3

2,4

0,3

----

----

----

Total expenses abroad

59,9

39,2

5,4

Net
foreign deficit (current account)

-21,4

-6,4

0,7

To come to the point, this year's current account deficit was 70% lower
than in the same period of 2008! That is an enormous accomplishment
overall!

When looking at details, the message becomes somewhat less euphoric.

Exports in 2012 were only 8% higher than in 2008. When considering that
Greece must have become quite a bit more competitive since then and
particularly when considering that the Euro now trades significantly
lower than in 2008, one would have expected a more significant increase
in exports. Here is obviously a lot still do do!

The major factor contributing to the improvement in the current account
balance were imports. Even though imports declined "only" 35%, the base
in 2008 had been irresponsibly high so that the large decline in nominal
terms was the primary reason in the improvement of the current account
balance. That decline in imports is largely the result of the recession.
It must be feared that imports will "explode" again should the purchasing power return to the economy. This is where structural reforms must counterbalance.

It is extremely worrisome to note that, while exports increased by 8%,
all other revenue categories (tourism, other income) declined quite
significantly. No explanation for the possible cause of that comes to
mind. Also, it seems that interest expenses were significantly higher in
2008. Their decline were another important factor in the improvement of
the current account balance.

The month of July 2012
The real surprise is that Greece recorded a surplus in the current
account for the month of July 2012. The last time this happened was in
the month of May 2010.

Actually, if the whole year could be like the month of July, Greece
would be a show case for a perfect current account balance: the country
showed a large trade deficit because its export base is small but it
more than made up for it through services (e. g. tourism). In fact, the
suplus in services not only allowed for coverage of all interest
payments but also for a surplus!

Sunday, September 16, 2012

Well, this is one more example of Mr. Tsipras’ showing his political competitors what leadership is all about!

There isn’t really anything in this declaration that a sensible
person could disagree with. And if I were a Greek, I would see a lot of
hope in it.

Personally, I think Mr. Tsipras would be bad news for Greece because I
feel sure that he would do even more of those things which got Greece
into trouble in the first place: an expanded role of the state. I
recognize, however, that this is an assumption on my part and my
assumption may be wrong.

Either way, political leadership is not about complying with all the
things that others, particularly foreigners, expect Greece to do.
Political leadership is about giving people a positive perspective for
the future.

Wherever one looks in the media, Greece seems to be a special case in the arena of sovereign debt problems. Yes, Spain and Italy present much bigger problems but Greece is in the forefront. Yes, all Southern countries have low tax revenue bases relative to Northern countries but Greece is in the forefront for tax evasion. Yes, tax payers in Northern countries are not happy about sending money to the South but when it comes to Greece, all sorts of emotions are being unloaded (in comparison with Greece, the emotions unloaded about Italy, Spain and Portugal - let alone Ireland - are practically non-existent).

Why is that so?

Well, it certainly is not rooted in history. On the contrary, all Southern countries have been traditional targets for tourism from the North but when it came to Greece, people would get watered eyes: What a wonderful country! What a wonderful people! A positive cult surrounded Greece.

The financial crisis of Greece - as well as of the other Southern countries - is often described as a consequence of the financial crisis triggered by sub-prime (beginning in mid-2007 and culminating with Lehman in the fall of 2008). That is what the benefit of hindsight suggests. Reality was different.

Lehman went bankrupt on September 15, 2008. Between then and year-end 2008, the world-wide financial system seemed to be on the verge of meltdown. In Germany, the government had to state publicly that all savings were guaranteed by the state in order to protect against a possible bank run.

And in Greece?

We spent Christmas 2008 in Greece. Forebodings of a crisis? No way! When I returned to Munich where I was working at the time, I told my colleagues and customers that the word "crisis" was not in the dictionary of Greeks. Instead, life there was booming and bustling.

I remember reading an analysis about Greece in early 2009. It addressed the question how Greece might be affected by the financial crisis. In essence, the analysis suggested that Greece was pretty much in safe haven: the banks had no exposure to sub-prime; the private indebtedness of Greeks was not nearly as high as elsewhere; Greeks were home owners and not renters; etc. etc. That analysis (which, unfortunately, I did not keep) suggested that Greece would make it through the crisis more or less unharmed.

In fact, the entire South seemed to be removed from the crisis. It was Eastern Europe which was the center of all fears and where rescue programs had to be urgently put together. In early 2009, I attended a private gathering where Prof. Dr. Michael Hüther (Head of the German Institute for Economy) gave a talk. His subject was Eastern Europe and everyone was anxious to hear whether or not Eastern Europe would survive. Prof. Hüther predicted that, yes, Eastern Europe would survive but it needed a rescue umbrella.

And at the end of his talk, he said something which is still ringing in my ears. He said: "And make no mistake. When we are done with Eastern Europe, we will have to set up a rescue umbrella for the South".

I don't think anyone in the room had any idea what Prof. Hüther was talking about. A rescue umbrella for the South? Those countries which had all done so well in the last decade? Which had tremendous growth rates? Whose creditworthiness was demonstrated by the fact that their interest rates had converged more or less with those of Germany?

My point is this: until about mid-2009, there was absolutely no public discussion about a potential financial hurricane developing in the South (with the possible exception of Spain where the real estate speculations were known but, still, they were deemed to be nothing compared with sub-prime).

Since there was no public discussion about problems in the South, certainly not about Greece, then there couldn't have been any prejudices or other aggressive emotions against Greece.

Whatever it is that caused today's aggressive emotions when the name 'Greece' comes up, it must have its origins in the time after the fall of 2009; after the new Papandreou government shocked the world with the admission that the public finances had not been properly reported.

I have no explanation as to what these origins are or might have been but I feel sure that all of this which ended up with the term "Greece-bashing" could have largely been avoided; at least reduced to a minimum.

Greece had no PR whatsoever! If anything, Greece had a negative PR as a result of the many public protests which flashed across TV-screens throughout the world.

One has to differentiate between PR for domestic audiences and PR for international audiences.

The domestic audiences want to be assured that they have a government which is in charge; a government which has cajones; a government which supports the interests of Greeks; a government which may have to implement tough measures but which is competent to explain to its people what the benefit of all of this is. With the benefit of hindsight, I think it is clear that the Papandreou government did everything in the book to make sure that Greeks would feel like the puppets of international interests.

The international audiences want to be assured that Greece acts according to well-established rules of the game in the world of finance. That is role-playing. A borrower in financial trouble should never go to its creditors with hat in hand and say: "We have big problems. You've got to help us!" Instead, the borrower should act like Napoleon did after his defeat in Russia. He should say: "We got ourselves into a deep mess but we know how to pull ourselves out of it. This is our plan and if you don't support it, you will hurt yourselves more than you will hurt us!"

A PR-agency would not have been the proper vehicle for that. Instead, the Greek negotiators should have surrounded themselves with people of international prominence. International consultants are the first ones who come to mind because they are not only consultants but, at the same time, they are lobbyists.

Suppose the Greek negotiators had surrounded themselves with their own Troika consisting of McKinsey, Boston Consulting and Roland Berger. These people are experts at the game of presenting 'stories' to justify further investments. Today's Troika continually second-guesses numbers and projections coming out of Greece. They continually suggest that Greeks cannot be trusted. If they were dealing with a "Greek Toika" as described above, they would have to adapt their style because their counterparts would tell them: "Remember that you are not only dealing with Greece here. You are also dealing with McKinsey, Boston Consulting and Roland Berger and we hope you don't intend to second-guess our judgement!"

Greece simply has failed so far to make a convincing case that tax payers' money sent to Greece is spent well!

What is a convincing case? A case which turns out to be 100% true? No way! No one ever knows at the beginning of a restructuring how it will eventually turn out. A convincing case is a case which the people who are expected to put up money are convinced by.

If I think of all the beautiful PowerPoint presentations which the above consultants could have made about Greece's wonderful future, my mouth starts watering. For about 3 years now, we have seen literally every day articles, reports, etc. showing why Greece has no future at all. Just imagine if one had seen the opposite from the start!

International finance is, to an important degree, a game of illusions. The illusion must be created that the lender gets his money back when he wants it back. Once the lender believes that, he no longer wants his money back. In times long passed that 'illusion' was called 'confidence'.

It is literally a shame that Greece missed the opportunity to present itself well, both domestically and internationally. Could some improvement still be made? Of course, it could. Just take the phone book and look up the numbers of McKinsey, Boston Consulting and Roland Berger.

A final example. Just take Mr. Roland Berger. He is no longer involved with the management of the consulting company bearing his name but he is still someone who can walk through the doors of most German policy makers quite easily. Who could "sell" Greece's 'story' more credibly to the German government: Mr. Roland Berger or the Greek Finance Minister? (without trying to diminish the professional competence of the Greek Finance Minister!).

Saturday, September 15, 2012

Let me first emphasize that it is next to impossible to change the culture in a large social system (be that a company or a public administration) in a short period of time. Any such social system has developed enormous powers to protect its survival as is. It acts like a cancer acts with the human body: it has seemingly endless resources to withstand treatment.

In my fourties, I worked for almost a decade for Creditanstalt, then Austria's premier banking institution: 125 years old; possibly the noblest Austrian institution; self-confident that the country could not exist without it (for sure, the country would have been different without it). Its executives were proud that when the Ministry of Finance had to formulate new laws, they came to Creditanstalt to write them. The bank had all the country's best private and corporate customers, the elite of the economy, and it employed an abundance of the best people which the country's educational system produced. Also --- the bank thought that the following had to be taken for granted: Creditanstalt didn't have to compete for the best customers and the best people. Instead, it was a distinction to do business with Creditanstalt and an honor to be able to work for it.

When globalization and Austria's joining the EU produced winds of change, the bank's management, the epitome of Austria's establishment, had an attack of self-recognition. They recognized that if the bank was to withstand these new winds/storms, it would have to adapt its culture: maintain the good and strong parts but do away with the arrogant waste.

Had a survey been made among employees whether the bank would ever change, perhaps 99% might have answered in the negative. The bank did change and it was a TQM-project (Total Quality Management) which helped bring it about.

TQM is essentially based on the involvement of all employees in the process of improving quality and bringing about change for the better. While "stars" play an important part in the spreading of a TQM-mentality, it is recognized that no social system could function if it had only stars as its employees (they would try to outsmart each other all the time). Instead, TQM is based on the notion that, while stars are important, it is the broad mass of employees who carry the day.

A group of about 200 was selected as "ambassadors" whose task it was to work with a total staff of about 6.500 in small group meetings. The technical term for that was "missionizing". Very soon it was recognized that one could hardly have chosen worse expressions for the task, but nevertheless.

I held about 30 such group meetings. We were not given a program. Instead, we were told to come up with our own ideas how to keep groups of 5-10 employees awake for about 2 hours after work talking about quality. Quality of everything. Quality of the organization, of its products, of its people, of its ethics, etc.

My technique was to present on a slide the Goethe quote of "Man should be noble, helpful and good!", say nothing and await the participants' reaction. In all but one meeting there was dead silence for quite some time. The one exception made a lasting impression on everyone.

The slide had hardly shown up when one of the participants, the manager of a small branch, literally exploded: "I can tell you one thing. With that attitude you will never make it to the Management Board of the bank!" Everyone laughed. In retrospect, I was happy that I came up with the following answer: "I am not naive enough to think that one makes it to the Management Board with this attitude today. But let me turn the question around. Couldn't one imagine that in order to make it to the Management Board of such a noble institution like Creditanstalt, it should be a prerequisite to share that attitude?"

Everyone quickly agreed on two things: that it should be a prerequisite but that this would never happen. I raised the question that, if we wanted it to happen, what could all of us collectively contribute to make it happen. With that, the 2 hours of the meeting went by in a hurry.

I can't say that TQM changed the entire bank. However, it became a major factor in triggering a substantial change in culture and attitudes after the process had taken place for about two years. Top management found itself trapped in its own initiative. Quite frequently when they displayed their unchanged authoritarian behavior and decision-making, some courageous employee dared to ask them the question whether they thought that this was compatible with TQM. In the days before TQM, that employee might have gotton fired for that. After TQM, top management found itself in the hot seat.

Anyone who thinks that one can change the Greek public administration simply by mandating new rules and by installing a few new bosses to implement those rules is in for a lesson. Before those new bosses accomplish anything, some of them might consider suicide because of all the bottom-up mobbing which they will confront.

I can only recommend that the government engages hundreds of counselors, taken from within the public administration (perhaps with the assistance of an external advisor), who are given a clear objective of what should be accomplished and who will tirelessly hold meetings in small groups to engage the employees in that mission.

Thursday, September 13, 2012

The German Constitutional Court (GCC) yesterday continued its policy of saying "yes, but...". Some people argue that the "yes" was strong and the "but's" were weak; others argue the other way around.

The international media have not given much attention to the fact that yesterday's ruling was a provisional one. The final rule is expected to come in about a month from now. Regarding the above "yes, but...", it can be expected that there will not be changes in the final ruling.

One point whose importance should not be overlooked is that the GCC stipulated that the implementation of the cap on Germany's liability (at maximum 190 BEUR) must be valid under International Law. It will be interesting to watch how the German government deals with this issue. They would be well advised not to deal with it too lightly!

A "light" dealing with this issue would take the form of an attachment to the ESM-Treaty signed by Germany stipulating the cap. Legal experts argue, however, that this would not make it valid under International Law. A "strong" dealing with this issue might have to the the form, in the extreme case, of amending the ESM-Treaty and having it ratified again by all participating countries.

Why is this important?

The GCC could "revenge" itself if it came to the conclusion that it has been "played" by the German government. Such a "revenge" could be based on the following.

In its preliminary ruling, the GCC ruled that "EBC bond buying in secondary markets is not allowed under EU-law". Put differently, the GCC has preliminarily said that what the ECB has decided to do last week is against EU-law. In its final ruling, the GCC could confirm this position (and is likely to do that).

Now, the GCC has no competence to rule within the context of EU-law. However, it does have the competence (private parties do not have that competence) to pass on its ruling on EU-law to the European Court of Justice and then that court would have to rule on the issue.

The GCC's carrot to the German government is that, if the government takes the issue of the cap seriously, they might not do that. Its stick is that they would do that if they felt "played".

Whether or not the European Court of Justice would rule on this issue similarly as the GCC is a matter of guessing. However, it would be best if that guessing would not have to come to a test.

I had an interesting exchange with one of my readers. The discussion was about the question to what extent Greece was really up to EU-standards in terms of public administration, etc. My point was that Greece had a lot of catching-up to do as regards EU-standards and that it should receive special help and aid (i. e. "special favors") from the EU to accomplish that.

In taking a different view, my reader pointed out some alternatives which would be available to Greece if it were not a member of the EU. I must say that that was interesting reading. Obviously, a parting of ways between Greece and the EU would have a tremendous impact on both sides. However, perhaps there are indeed alternative affiliations open to Greece which would be better to the country than the present affiliation with the EU. Below is the reader's comment.

Greece has the same privileges as any other EU member, so it should have
the same obligations as any other EU member. If it can't live up to
those expectations then it should exit the EU.

If it did then it
would enjoy the benefits of being an un(der)-developed country. It
could call on agencies like the UNDP and World Bank for advice &
loans. It could get third-world development aid from the EU. It could
join NAM, Jim O'Neill could put in one of his acronyms.

But most
of all it could get aid from EU member states, most (all ?) of which
channel the bulk of their foreign aid via their own or UN institutions
rather than the EU. The EU as an institution has no record of being a
major development agency. It's barely been able administer Kosovo, so
why should we expect it to solve the problems of Greece.

The
history of Estonia is not so different from Greece, in terms of foreign
masters etc - although it never had an Empire, so it never ruled any
foreign countries like Greece has. Estonia became free of its most
recent occupier about 20 years ago, whereas Greece got rid of its
Ottoman masters almost 200 years ago. If Estonians can pick themselves
up by their bootstraps, why can't the Greeks - maybe history has
something to do with it.

I do believe the Greeks had quite a bit
to do with the Byzantine Empire, the fact the the Patriarch of
Constantinople is the nearest thing the Greek Orthodox Church has to a
Pope is a testament to that. And the Roman Empire (as opposed to the
Roman Republic) was in the eastern region at least as much a Greek
affair as it was Roman. No other colony ever had such a major influence
on its colonisers as the Greeks did on the Romans. After 620AD Greek
was the official language of the Byzantine Empire.

Gibbon on the
Byzantine Empire - "the Byzantine Empire was vitiated by a bureaucratic
over-elaboration bordering on lunacy: quadruple banked agencies, dozens
or even scores of superfluous levels and officials with high flown
titles unrelated to their actual function, if any. Access to the Emperor
and his council was controlled by powerful and inscrutable eunuchs and
by rival sports factions."

What we see in modern day Greece is more of the same.

Whilst
ever the Greek Elites and Hellenophiles see the EU as part of the
solution and not as part of the problem, then I believe Greece is doomed
to becoming the first failed state from the first world.

If
Greece was relegated to the European Customs Union, it would enjoy the
benefits of being a most favoured country with respect to trade, but it
would not be constricted by EU Treaties and rules - nor would the EU or
its member states be restricted in terms of giving it aid and assistance
- they could even forgive Greece some of its OSI debt. They could help
it set up SEZ's - but it would not have access to the ECB alphabet soup
bowl.

Wednesday, September 12, 2012

The Greek economy is in shambles. Greece has absolutely no chance to comply with
the austerity requirements on a sustained basis because the economy of Greece
is a basket case and because there seem to be no plans whatsoever (neither on
the part of Greece nor on the part of the EU) how the economy could get going
again. There is no industrial development plan how
to convert a corrupt and crony-driven economy into a value-generating market
economy. This is not a project for a few months, nor even for 2-3 years. This
is a project for an entire generation and it has to be planned accordingly.

Economists have calculated that Greece, since
the Euro, has become roughly 40% more expensive relative to Germany. However,
the Greek Euro has maintained the same international purchasing power as the
German Euro. Consequently, Greece has imported products and services from
abroad instead of producing them domestically. The Greek economy has become a
zombie-economy which had lost its business model long before the financial
crisis of 2008: 80% of the economy consists of services, i. e. “selling each
other souvlaki at inflated prices and paying for them with money borrowed
abroad”.

Looking back

From 2001-10, Greek imports amounted to 446
billion EUR compared with exports of only 146 billion EUR. Despite the present
recession which brought imports down and even increased exports, exports still
only cover 40-45% of imports (compared with 78% in the USA and even 93% in
Italy). The current account deficit during this period was 199 billion EUR!
This luxury of the Greek economy was financed through foreign savings.

From 2001-10, the gross external debt of
Greece increased from 121 billion EUR to 409 billion EUR; representing a net
increase of 288 billion EUR. Most importantly, the foreign debt of the private
sector (212 billion EUR) is higher than the foreign debt of the public sector
(187 billion EUR). Even if all of Greece’s sovereign debt were forgiven and
even if the budget could be balanced, the problem of the Greek economy would
remain.

The Greek economy literally “burns” money.
The current account deficit for 2011 was still as high as 21 BEUR. Deposit flight from January 2010 - March 2012 was in excess of 70 BEUR.
In the past, the ECB has filled this “hole” by lending money to the Greek
banking sector. Picture the following: the ECB sent tax payers money to the
Greek banking sector so that wealthy Greeks could – perfectly legally via bank
accounts – transfer their own money abroad and so that the Greek economy could
import goods instead of producing them domestically! How much longer will the
ECB be able to do this? (presently, they have lent roughly 100 billion EUR to
the Greek banking sector).

Diagnosis

Greece is not a bottom-less pit. However, it is a pit with 3 big holes: budget deficit, current account deficit and capital
flight. Quite a bit has been done already with regard to the budget deficit but
more needs to be done. Nothing has been done yet as regards the current account
deficit and capital flight.

If Greece does not get a handle on the
current account deficit and on capital flight, the country has absolutely no chance!!!

An industrial development plan needs to aim
at reducing the current account deficit and at eliminating capital flight.
Exports can probably not be increased at a significant rate because Greece does
not have all that much to export (yet). Revenues from tourism can probably not
be increased significantly, either, because they are already very high and
because Greek tourism – objectively speaking – isn’t really all that
competitive (Greek tourism lives very much on cult).

Consequently, it is imports and capital
flight which are the two factors left which could make a difference, and a big
difference they could make indeed! Imports must be drastically reigned in (and
replaced, as much as possible, with domestic production) and capital flight
must simply be stopped outright.

If Greece left the Euro and returned to the
Drachma, all of the above would happen automatically: the new Drachma would
devalue by at least 30-40% making all imports more expensive accordingly;
capital flight via bank accounts would no longer be possible because banks
would not have the necessary local currency.

A Euro-exit, above all an uncontrolled one,
would probably be the worst of all evils in the present chaos. Financial assets
of Greeks (savings) would overnight become 30-40% worth less in terms of
foreign currency. Bye, bye social peace!

A possible solution

If a Euro-exit is the worst of all evils and
if Greece cannot make it with the present Euro-structure, then Greece must hold
on to the Euro and simulate a situation – at least temporarily – as though she
had returned to the Drachma.

Temporary measures: special taxes on imports
in order to make imports altogether 30-40% more expensive (on a staggered
scale, however: 0% for priority imports; 100% for luxury imports); selective
Free Trade Zones where internationally competitive business conditions are
allowed so that new domestic production for import substitution can be started;
and capital controls.

This would violate EU-treaties (free movement
of goods/services) but treaties can be amended, if only temporarily. This is an
emergency and an emergency requires emergency legislation. For the EU it would
clearly be more beneficial to approve such amendments so that Greece can build
up a value-generating economy instead of continuing to send tax payers money to
Greece so that a zombie-economy can be kept up.

A new Investment Law of constitutional rank
must be established which assures the potential new investor all the
internationally competitive business conditions which he desires. Since no one
seems to trust any Greek law any more, the EU should guarantee compliance with
this Investment Law so that investors do not have to carry any political risk
(economic risk they have to carry!).

The investor would find an economic nirvana:
he can produce competitively and he already has an assured market demand. And
he is covered against all sorts of Greek political risk.

Wealthy Greeks hold hundreds of billion Euros
in foreign bank accounts. The new Investment Law must aim at the voluntary
return to Greece for new investment of parts of those funds. Greeks are good businessmen
and they recognize a good business opportunity quickly. Why should wealthy
Greeks prefer to earn 2% in Switzerland when they could earn a multiple thereof
in Greece with the same security?

Why selective Free Trade Zones and not the
whole country to begin with? Because one cannot restructure a country’s economy
from A-Z at one and the same time; that would lead to a revolution. Instead,
the objective has to be to make the Free Trade Zones work well and to hope that
their economic framework will rub off on the rest of the economy over the
years.

Of foremost priority is good business
governance in the Free Trade Zones; everything must be on correct and
transparent footing. If the Greek way of doing business (tax cheating,
corruption) set foot in the Free Trade Zones, the project would be doomed from
the start. There would have to be efficient control mechanisms such as regular
audits by reputable auditing firms. Perhaps even periodic EU-inspections (after
all, they guarantee compliance with the Investment Law).

The great risk associated with import
controls is always that this protection of the domestic economy is misused by
domestic manufacturers. Suppose an imported tooth paste costs 1 EUR per tube
and the new internationally competitive conditions in the Free Trade Zones
allow the domestic manufacturer to also operate profitably at that price.
Assume further that a 100% special tax will temporarily be imposed on the
imported tooth paste so that the domestic manufacturer can start up his
business. Thus, the imported tube will now cost 2 EUR. The risk is that the
clever Greek businessman may now want to sell the domestically manufactured
tube at 1,99 EUR.

This is not how the system can work! The
objective of the Free Trade Zones is to build up sustained domestic
manufacturing. They cannot be misused by clever Greek businessmen to produce
competitively but sell at twice the price. The benchmark always has to be the
international price!

Closing commentAll of this sounds very much like a planned
economy, but it isn’t. It all depends on the new Investment Law is formulated.
The law has to establish firmly those rules within which entrepreneurs can act
freely and to their profit. An effective Investment Law will offer the investor
an attractive relationship between security, risk and reward. If that is
accomplished, the investors will come on their own.

Chile showed in the late 1970s how a good
Foreign Investment Law turned a formerly communist and planned economy in a
short time into the „darling“ of foreign investors. Why should Greece not be
able to accomplish the same? (particularly with the EU-guarantee, of which
Chile had no equivalent).

Argentina has attempted several economic
stabilization plans over the decades and for a limited period of time they all
seemed to work. The foreign money of Argentines always returned quickly to the
country and accelerated the recovery. However, as soon as the first clouds
appeared on the economic horizon, that money left the country as quickly as it
had come. Greece must accomplish the “trick” to create the kind of economic
framework so that the foreign financial assets of Greeks stay in the country on
a sustained basis.

The government must assure that many
investment opportunities are always on offer for investors. They must be well
presented and accompanied by base case business plans, and they must be
publicly tendered. The government could even involve some PR-coverage to
stimulate a “run” on such new investments (based on the theme: “let’s get in
before the door perhaps closes again”).

The issue of Greece’s sovereign debt was
purposely not addressed here because that problem is, in comparison, the
smaller problem. A foreign debt problem can be solved with a few hundred people
in a conference room (provided that they can agree on something). However, to
develop an industrial development plan for the Greek economy and to
successfully implement it, that requires the best brains not only of Greece but
also of Europe.

But: once there is an industrial development
plan for Greece, the sovereign debt problem will be much easier to solve
because the country’s creditors could, for once, have the hope that there could
be light at the end of the Greek tunnel!

The North is getting impatient with Greece and does not want to send more money. However, the North must be aware that one cannot have the cake and eat it at the same time. Either the North supports and promotes increased economic value generation in Greece so that Greece can develop its own, self-supporting economy, or the North will have to accept the fact that permanent transfers are unavoidable.